European Banks Dump Massive Amounts of Subordinated Debt on Investors

Banks have taken advantage of yield-chasing investors to issue $90.7bn of subordinated debt for the year to date, a 41 per cent increase compared to the same period in 2012. It is the highest such volume since the $122.4bn seen in 2008 according to Dealogic, the data provider.

The figures follow a deal agreed by European regulators earlier this month that will bring in so-called bail-in rules for senior bondholders from 2016, two years earlier than envisaged by finance ministers in their common position agreed in June.

take our poll - story continues below

Will you vote for President Trump in 2020 if he can’t get the wall built?

Will you vote for President Trump in 2020 if he can’t get the wall built?

Will you vote for President Trump in 2020 if he can’t get the wall built?*

Yes.

No.

Yes, it's the Democrats fault.

Email*

Comments

This field is for validation purposes and should be left unchanged.

Completing this poll grants you access to Freedom Outpost updates free of charge. You may opt out at anytime. You also agree to this site's Privacy Policy and Terms of Use.

Banks are also expected to issue record amounts of loss-absorbing contingent convertible – or “coco” – bonds next year, which can either convert to equity or wipe out investors entirely if a bank’s capital ratio falls below a pre-agreed level.

Junior Bonds

An apt description for "subordinated debt" is "junior bonds". From Wikipedia ...

Subordinated debt (also known as subordinated loan, subordinated bond, subordinated debenture or junior debt) is debt which ranks after other debts should a company fall into liquidation or bankruptcy.

Subordinated debt has a lower priority than other bonds of the issuer in case of liquidation during bankruptcy, and ranks below the liquidator, government tax authorities and senior debt holders in the hierarchy of creditors.

Subordinated debt is issued periodically by most large banking corporations in the U.S. Subordinated debt can be expected to be especially risk-sensitive because subordinated debt holders have claims on bank assets only after senior debt holders. Subordinated debt holders also lack the upside gain enjoyed by shareholders.

Consider asset-backed securities. These are often issued in tranches. The senior tranches get paid back first; the subordinated tranches later. Mezzanine debt is another example of subordinated debt.

Subordinated bonds are regularly issued as part of the securitization of debt, such as in the issue of asset-backed securities, collateralized mortgage obligations or collateralized debt obligations.

Corporate issuers tend to prefer not to issue subordinated bonds because of the higher interest rate required to compensate for the higher risk, but may be forced to do so if indentures on earlier issues mandate their status as senior bonds.

Now that we know what subordinated debt is, it's easy to understand the increase in issuance. It relates to bail-in procedures in the alleged European "banking union".

Gunnar Hökmark, the lead negotiator for the parliamentary side, said: “We now have a strong bail-in system which sends a clear message that bank shareholders and creditors will be the ones to bear the losses on rainy days, not taxpayers."

Details show the alleged rainy-day fund is a pathetic €12.5bn of joint funds not available until 2020, even though 128 banks covered in the agreement have an aggregate balance sheet somewhere between €26 trillion and €27 trillion.

About the AuthorMike "Mish" Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Mish also writes on economics in the world at Global Economic Analysis. He currently does fundraising to benefit ALS (Lou Gehrig's Disease) research, which claimed the life of his wife of 27 years, JoAnne, in May of 2012. When not writing about stocks or the economy Mish spends a great deal of time on photography and in the garden. He has over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.

Join the conversation!

We have no tolerance for comments containing violence, racism, vulgarity, profanity, all caps, or discourteous behavior. Thank you for partnering with us to maintain a courteous and useful public environment where we can engage in reasonable discourse.